The Exchanges

Q miraculous, game-changing, and an awakening. If that's not how you would describe your investment management tech, request a demo at ridgeline.ai. And now, back to the show. So as LPs see the trends and how you're describing the challenges of getting back to a distribution yield that might work for them on a longer-term basis, how do you recommend LPs go about thinking about their portfolios in this new environment?

A When we ask GPs, what is your vision and what is your right to win? We ask the same thing to the LP. What are you trying to accomplish in your private markets portfolio? What is its role? What is your right to win as an LP? One of the things we've been telling the LP community is you need to scale with alpha generators, not with capital aggregators. They're very different things. So do you have a process and a set of tools that allow you to identify alpha generation? If the answer is yes, are you aggregating your exposure with the managers That are producing that alpha. And over time, those managers should have scarcity. Access issues. We've been telling our limited partners, you have to be able to pitch those GPs on why you're the right partner for them. What are your unique capabilities that will allow a partnership together to not only help you succeed, but that GP succeed? If you can articulate that, that's a differentiator. That'll stand out. You also have to start to build real time active portfolio management capabilities. We think the asset class today is overvalued by about 10%. But that measurement moves a lot, and the liquidity of the asset class can come in and out rapidly. If you have a data-driven perspective on relative value and liquidity, And you have an information advantage on your own portfolio. You could be an active buyer and seller of your own book, wheth…

AI assessment note: “you need to scale with alpha generators, not with capital aggregators”

Q So you've got the sports business, you've got this working with practitioners in the space. How are you seeing these two collide?

A It's been a beautiful, like, emerging property of the last five years. If you look at the people who have purchased control of North American sports teams over the last decade, 80% of them come from tech or private markets. It's because they're business builders. They have a sophisticated institutional grade mentality on change and the value of change, but they also have lots of ordinary income and the sports properties create a huge tax shield. They are not correlated with healthcare or tech or finance. You're not allowed to use a lot of leverage. So if you are a titan of private markets, You have a lot of levered exposure to all kinds of equity, and you have a lot of ordinary income. There is a really unique benefit to being a direct sports owner if you are coming from the finance industry. And so from time to time, we have the opportunity to help leaders of private markets firms become owners of sports assets. There's actually a really unique overlap between our Keystone business and our sports business in that some of the leaders of both industries are the same. Look at Josh Harris, and David Blitzer, and Ostrover, and Eric Getty, and Rubenstein now. It's a pretty impressive list.

AI assessment note: “unique overlap between our Keystone business and our sports business”

Q So you've alluded to this idea. What is this investment opportunity you've been pursuing?

A It's going to take a while to unpack, but the market opportunity that our firm and our fund is focused on are minority stakes in professional sports franchises and all of their related assets In the big five North American sports leagues. So those are major league baseball, the national basketball association, national football league, major league soccer, national hockey league, plus the premier global sports platforms in rest of world. That is a total addressable market today of about four hundred billion dollars. There are really Three kinds of transactions that we're pursuing. One is liquidity to both minority owners and control owners of these assets. Growth capital or operating capital to help these businesses achieve their growth targets and operating objectives. And then the third category is acquisition financing. Helping these platforms acquire more assets and become platforms, helping them acquire other franchises to capture revenue and cost synergies, or helping a new control owner acquire their first platform asset. Those are the three kinds of transactions that we are implementing across that TAM. Our fund is the very first fund designed to provide institutional investors with diversified exposure. To each of those leagues, diversified exposure across markets, ownership groups, and deliver an uncorrelated low leverage private equity return In an asset class that t…

AI assessment note: “the market opportunity that our firm and our fund is focused on are minority stakes”

Q So when you go into sourcing all of these, let's say hard to find assets in some sense, or who the owners are, how do you then go through the due diligence process to confirm that there are these stakes that you'd like to get a hold of?

A So the diligence process for us starts once we've identified a potential partner or a potential counterparty. And we've had some reasonable discussion around their expectations around terms. Remember, there's three layers to each of these assets. There's the league, there's the club, and then there's the platform assets that the club owns. We've done all the work at the league level, and depending on the league, 40 to 80% of the economics for each team are generated at the league level. So, even if it's a club we've never seen before from a diligence perspective, We probably have a very strong view on 40 to 80% of the value that that club has at the league level. At the local level, our process looks just like any direct investment underwrite. Line by line, every piece of revenue, every cost, decades worth of, of underwriting. We think about everything probabilistically, not static case. So we have wide variations in outcomes for each of those variables, especially the longer the horizon. So our due diligence process, there are parts of it that look a lot like a normal private equity underwrite, but then there are parts of it that look very statistical in their output.

AI assessment note: “our process looks just like any direct investment underwrite. Line by line, every piece”

Q Ian, what teaching from your parents has most stayed with you?

A My father was a mechanic. He was a laborer. Busted hands, busted back, and best I could tell, he hated his job. He loved the people he worked with, but he just, it was a grind. He would always tell me, anything's possible. If you put your mind to it, anything is possible. And The contrasting nature of that statement and how hard he had to work always stuck with me. And my mom, my mom taught me to believe in myself or she tried to, it didn't really stick for a long time, but they were both really good about just constantly saying, if you put your mind to it, anything's possible. Don't give up. And I'm grateful for that.

AI assessment note: “He would always tell me, anything's possible. If you put your mind to it”

Q I'd love to dive in a bit on your investment process because such a unique asset and space, particularly within the minority ownership, how do you go about finding the opportunities? It's probably not hard to be able to define, hey, there's a 150 teams, but that feels quite different from figuring out where you can purchase stakes.

A I want to go back to the three kinds of deals that we do. There's liquidity to the limited partners or minority shareholders. There's also liquidity, partial liquidity to the control owners. That's category one. Category two is acquisition financing, and category three is growth capital or operating capital. Across all three of those transaction types, we've originated in the last 22 months, almost twenty five billion dollars worth of deal flow. There's a tremendous amount of deal flow in this space. If you go category by category, In the 180 platforms, we have built out as one part of a very large data platform that we've built. We have a database of over 1200 limited partners in these pro sports platforms. And I always draw an analogy to the early days of the private equity secondaries market. There used to be a book called the alternative investors directory. And that was the golden Glengarry leads for the secondaries market. Like if you had that book, you knew who to call. And so for that part of our strategy, it's like we've gone in a time machine back into 1998 to 2001, and we've got the only copy of that directory. We have this proactive origination campaign to put our team, our firm, And the insights that it has to offer the resources that it has to offer in front of the control owners and the executives of these platforms, that whole process, that business unit was mod…

AI assessment note: “We have a database of over 1200 limited partners in these pro sports platforms.”

Q As you're talking to GPs about this framework, how do you think about the importance of what their goals are? Is the goal to move up the pyramid? Is it to make sure you don't fall down the pyramid? How does that change based on where you sit in the pyramid?

A Managing partners tend to be hyper competitive. So when you tell one of them they're a level five, they want to gamify why and how do I get this? Well, hold on a second. Where are you actually trying to take this from? A level five firm is typically single strategy, best in class manager. They are very, very good at what they do. They're very content to just stay where they are and come back to the market every two to four years. If you want to stay a level five firm, because of changes in the market, you have to put energy into managing that business to maintain your level five. Place. The market is changing, the client is changing, and the competitive landscape is changing in ways that require you to level up your firm's capabilities, even if you just want to stay where you are. And that's a big shift that's taken place over the last four or five years. As this market has matured, the quality of talent that is required to just stay where you are is significant. If you want to grow, which is kind of what leveling up implies, I said it earlier, the organizational complexity is non-linear. The capital that is required to grow is significant, and depending on how you grow and where you grow your organization, one of the things that we challenge you on is, do you have a right to win in the direction that you're going? Do you have the skills in the six or seven areas that we think …

AI assessment note: “If you want to stay a level five firm... you have to put energy into managing”

Q When you look at a firm that say wants to go from level six to level eight, how do you diagnose where they have a right to win?

A We have what we believe is one of the most sophisticated software platforms for isolating and estimating alpha generation for the manager. It's a service that we provide to the manager. It's a collaboration with them. They give us very detailed data because they're about to make big strategic and talent decisions. So we have this very clean data that goes through a proprietary process for diagnosing skill versus luck. And then breaking that down across every strata that matters. Industry, deal partner, size strata, geography, product. As you start to disaggregate performance, you can start to identify where in the process that came from. First of all, have you generated enough alpha to justify taking illiquidity from the client? A lot of firms, the answer is no. Especially net a fee and carry. But for those where it is significantly positive, where is it coming from? Do you buy really well? Do you exit really well? Do you pay full or high prices, but create massive change within the organization while you own it? We can measure those things. And that gives you clues as to where the skill within the organization is different from the competitive landscape. And you know, I'm not a huge sports fan, but the Arctos brand started in sports. And I've learned there's actually tons of similarities between the sports industry and the asset management industry. The higher the skill level …

AI assessment note: “proprietary process for diagnosing skill versus luck. And then breaking that down across every strata”

Q On the way that fund flows have increasingly concentrated into the level nine and 10 firms, the one you hear most about is private wealth. If all of this money is going into clearly asset aggregators, what happens with all of this private wealth capital coming into the space over the next five or 10 years?

A There are really big firms that generate tremendous alpha. There are really big firms that have a couple of products that generate tremendous alpha. We call these organizational competitive advantages, OCAs. There are some firms that have built firm level OCAs. The firm has this machinery that creates alpha. If you have firm level OCAs that are transferable across strategies and across markets, you can be a high conviction alpha generator across products Across industries, size strata, but it is rare. I bet only about a third of those level nine and level 10 firms have that. The changes that are happening, unlocking the wealth channel and bringing more regulatory friendly product to the insurance channel. Those are just packaging for the alpha and the beta. And then the question is, What is the cost of delivering the package? If a scale manager who has broad-based alpha generation can put that into a package that is digestible and accessible by the wealth channel with a cost structure that leaves some of that alpha with the client, that's an incredible thing. That will help solve a lot of the actuarial challenges and the demographic challenges that we have, especially in the US retirement system. If the packaging costs more than the alpha, then we're just selling people a bunch of really expensive beta, and that's not good. I think some firms are going to do a really great job …

AI assessment note: “we're just selling people a bunch of really expensive beta, and that's not good.”

Q What are some of the examples of what that most important thing has been in some of the partners that you've worked with?

A Thinking about consolidation and how you should play it is a big work stream in our pipeline today. Helping firms build their balance sheets so that they can continue to grow their firm and make big commitments to their funds in spite of the distribution slowdown is really important. Helping firms think about their right to win around new products. If what you're trying to do is create opportunity for a subset of your talent to keep them here and keep them hungry and keep them motivated, Here is the thing that the math implies you are great at that we know LPs are looking for. This is the thing you should do. And then how do we help you finance that growth and increase the probability of success? Another big thing is how do I do all of these things without selling permanent equity? Your options today are sell equity forever or take on a loan. That's it. And I'm not sure putting a loan on a firm that does leverage buyout is an incredibly stabilizing thing. It's probably not a good idea. Unless you're huge, it's the next. 800 firms that are not well served. And so if we can help you finance innovation and change in your organization in a non-permanent way, that's powerful. It's more aligning with your investors, more aligning intergenerationally with your team. And Another part of our pipeline today is helping firms that have sold permanent equity buy it back. We just helped Hayf…

AI assessment note: “We just helped Hayfin, one of the largest private credit managers in Europe, buy 60%”

Q And as you go through each of those now topics, you can take one at a time, M&A, elections, and deal activity. What's the narrative around why that's happening?

A There's this animal spirit around the election results, the new administration, deregulation, and you can see that animal spirit in the price change of publicly traded adults, managers, strategic advisory firms. Their share prices have moved in non-market ways, reflecting that animal spirit. Whether that manifests itself into actual deal activity, to be determined, Manager consolidation and M&A is a theme that has been emerging and dominant for the last couple of years. But it is an emergent trend from several themes that are happening under the surface within this asset class around fundraising, product proliferation, insurance, wealth. All of those sub-themes are driving M&A and consolidation, and we have a whole framework to break down firms that look similarly from an organizational complexity perspective. That allows you to understand why certain M&A is taking place and anticipate moves on the chessboard for some of the bigger consolidators, what we call level nine and level 10 firms.

AI assessment note: “There's this animal spirit around the election results, the new administration, deregulation”

Q How do you get your hands around how these assets have performed historically?

A That's a great question. One of the most powerful Statistics that I've come across in this market is that over the last, I think it's 115 years, US inflation has run at an annualized rate of around, I think it's 3.1%. US public equities have compounded at around a 5.9%. And equity in the New York Yankees has compounded at 9.7% per year for a 115 years. There is a unusual predictability and durability to these assets. That is unlike anything I've ever been a part of underwriting across alternatives. I used to have a portfolio that comprised over 20,000 private companies, properties and projects. I don't know what SAS businesses are going to be around in five years, 10 years, 15 years, or which airports are going to be critical pieces of infrastructure, 2030 years from now. But I do know 50 years from now, there will be a world series in October. The leagues have that kind of longevity and importance, the sort of universal appeal Globally, nationally, and locally. When you go into the underwrite and you try to understand these businesses, go back to those three layers that I talked about. Once you feel like you understand the league economics and league level assets, that's a beta factor that is shared by all of the teams in that league. And so you really only have to do that underwrite quarterly. At the local level, you're underwriting the ownership group, the management team, t…

AI assessment note: “equity in the New York Yankees has compounded at 9.7% per year for a 115 years”

Q How did the two of you come together?

A So our origin story actually starts in 2011. During my time at Landmark, I looked at a lot of really exotic strategies and really unique assets. We were approached by a number of different sellers of minority stakes and sports teams. And a small group of us looked at those opportunities to try to figure out, is this an asset that could fit our mandate? And if not, is this an asset that we could build a business around? So we spent a lot of time with the data science team at Landmark evaluating the sector. And I personally fell in love with the attributes of the asset. It had a lack of correlation. It's really hard to find. It had attributes that looked a little bit like a blend of core infrastructure, core real estate, but also growth equity. That's a really strange mix. What we couldn't figure out is would the leagues let us do it? Because institutional ownership has been prohibited by the North American sports leagues for a long time. I'm sure we'll talk more later about why that is. But if we couldn't Build a scale business around it. It just kind of wasn't worth our time. So we just went on our way and look for other assets, but you would share good ideas with other investors. And basically eight years later, I had an LP come to me and say, Hey, I don't know if you know this, but that sports thing that you told us about a long time ago, did you know the leagues are starting…

AI assessment note: “So our origin story actually starts in 2011.”

Q So you mentioned earlier that the last time the leagues allowed institutions in, there were a bunch of incidents of forced selling. And while not optimal, private equity fund structures generally have an end of life. Maybe that's evolving now, but many of them do. How have you thought about your own exit strategy down the road?

A So our exit at the fund level and the deal level, and frankly, in the due diligence process and the data science platform that we're building, we do consider all of that stuff to sort of be part of our secret sauce, intellectual properties. We don't talk a lot about our own structuring and architecture. What we do talk about is the limitations of traditional private equity architecture and what that means for investing in these leagues. So some of the leagues require that a fund have at least 10 years left in its term to be considered for approval. So if you're in a traditional 10 plus two architecture, unless you're trying to do a deal in one of these leagues during your fundraising period, you don't qualify. Some of the leagues Require that you have at least 500 or seven hundred million of capital dedicated to their league. Well, again, that's pretty hard for a traditional fund architecture to comply with. You're not allowed to use leverage. You're not allowed to use the assets as collateral in a back levering package. You're not allowed to have formal governance control. So if you're a control buyer, if you're a control LBO fund, Well, the, the L doesn't work and the B doesn't work. And if you've got like your four pillars of plow or your flywheel of excellence or whatever bullshit's on slide through your fund deck, it doesn't work here. You have to be prepared to be a passi…

AI assessment note: “We don't talk a lot about our own structuring and architecture.”

Q So when you bring this all together in your framework, at which level does Arctos sit today, and where are you hoping to take the firm over time?

A Arctus is what I call a skinny level seven. We're hanging on by our fingernails. Our goal has been the same the entire time we've been building this place. It was a beautiful part of our origin story really early on. The founders got together. Instead of doing the things that founders want to do, find the office space, finalize the logo, pick the name, all the kinds of things you feel like you have to do, we paused for a couple of days and did some really hard work. To figure out what are the core values that we want to instill in this thing we're going to build together? And how are we going to define our vision? And the way that we do that is our passion and our niche. Passion is we want to disrupt and innovate the markets that we serve. And our niche is how we do that by solving complex problems with creative solutions. So what we want to do is disrupt and innovate the markets that we serve. By solving complex problems with creative solutions. We do that in sports, and we do that in private markets. And we have a right to win, and we know how to articulate that right to win, that alpha equation very clearly. As an investment committee, we make sure that that alpha equation is demonstrable in everything that we do, and then we just try to delight the client. That's it. Where that takes us, level eight, level six, level one, I don't know, but I know that this has been an incre…

AI assessment note: “Arctus is what I call a skinny level seven. We're hanging on by our fingernails.”

Q As you see this reckoning coming, there's a subset of the existing GPs that are going to struggle in that environment. What do you think happens with the talent at those firms if, let's say, they're unable to raise a successor fund?

A Everyone wants to go back and find the thing that looks like the new thing and draw comparisons. There's nothing like what you're describing. After the GFC, there was this wave of firms that got labeled zombie firms. They hadn't raised any money, weren't going to earn carry, lots of value trapped. That's not what we're talking about here. There is tremendous unrealized value and unrealized gain Managed by really talented people and the firms that they're a part of are going to come to market in the next 12 to 24 months, and they will not achieve the fundraising target that they need to feed all of the ambition and the mouths at that organization. I don't know what happens to those firms. We're trying to help some of them figure that out right now. There's lots of paths those firms can take, but they're not zombies. They're almost penguins on a melting block of ice. You don't know how fast it's melting. It might not even be melting. And you can just sit and wait it out. You can jump off and find your way back to land or a bigger block of ice. Helping these firms prepare for this challenge. Make sure that they're clearly articulating their right to win. Making sure that they have the skill and talent in every area that matters. That is required to compete for whatever capital is available. That's what we're focused on.

AI assessment note: “I don't know what happens to those firms. We're trying to help some”

Q So as you're talking to GPs, what are you hearing are the most important needs and challenges they're facing?

A I don't think most market participants appreciate or understand how complex these businesses are. The management company, the GP, that is a complex business. And as the firms grow, And mature. That complexity increases in non-linear ways. These are challenging businesses, but the leaders of these businesses typically are great investors, but they're also entrepreneurs. And that entrepreneurial journey is particularly lonely in this industry. And so our team's job, the thing that I love is serving the entrepreneur on that journey. The way that we do that is powered by data and some really cool tools to break down the market, to break down firms and the competitive landscape in particular strategies. That's what we bring to these conversations. But it's funny when you go talk to a GP, they are so hyper focused on their business, on their strategy, on their team. Very rarely do they have a perspective on the broader market. They tend to pop their head up every three or four years. And go ask for money. They're not in the market data with a pulse on the market. That's just not their job. And we have some really powerful tools to measure sentiment. And that's part of what we do every quarter. We call them our now narratives, where we can mathematically summarize the things that GPs care about right now and the things that LPs care about right now. And we actually push those out ever…

AI assessment note: “our team's job, the thing that I love is serving the entrepreneur on that journey.”

Q How do the tools you've developed help an LP think about their cadence of investing?

A One of the questions we get a lot Is will the deregulation and the animal spirits and all of the focus on exits, will that unlock an exit boom? You have to use very precise language when you talk about distributions, because what actually matters to the LP is not the dollar value of distribution. It's the distributions relative to their unrealized book. That yield is actually the important thing. The yield of private equity today is as bad as it's ever been. You're in the bottom quintile of distribution yield right now. But over the last 10 years, dollar distributions have been pretty consistent out of North American buyout of about forty billion a quarter. There's only one exception. It's the twenty-twenty-twenty-one bulge up. 10 years ago, there was about twenty billion of drawdowns a quarter to this really nice Net cash flow yield. But over the last decade, while distributions have been very consistent at 40 a quarter, Drawdowns have doubled to 40, and NAV has tripled in the last five years, so the yield has just nosedived. If you just get an average yield on all of the accumulated NAV, this year would be the biggest exit year ever, and it would exceed the best year ever by about 20, 25% in dollar volume of exits. And that's the challenge. Unless the asset class flips to a cash generative piece of the portfolio, it will not change the fundraising environment for all but the …

AI assessment note: “One of the questions we get a lot Is will the deregulation”